Track Your Net Worth To Stay On Track Financially

by Hank Coleman

?Almost half of all Americans do not know what their net worth is. They have not bothered calculating it, do not see the benefit of it, and many do not even know how to make the calculations. Understanding how to calculate your net worth, how much you have in assets, and how much money is tied up in liabilities that you owe is critical to ensuring that you are on the right track financially. Calculating your net worth is very easy and something that every family should do about once every three months as an azimuth check to ensure that you are headed in the right direction. There are a lot of online tools such as a savings calculator can help you calculate and track your net worth.

What is net worth? Net worth is what public companies call equity. Just like your home, it is the value of your investments, assets, and possessions after taking into consideration how much you owe other people in the form of loans and liabilities. Net worth is the result of subtracting your liabilities from the total of all your assets. If you own a $200,000 home and have $100,000 in retirement accounts, then you have $300,000 in total assets. In this scenario, if you also have $10,000 in credit card debt, owe $5,000 on your car loan, and have an outstanding mortgage on your home of $150,000, then you have a total liability of $165,000. Based on this example, you would have a net worth of $35,000 ($200,000 – $165,000).

Understanding how to calculate your net worth and continuing to track its value over the long term can help you determine if you are heading in the right direction financially. Because you have to list all of your investments when calculating the total assets portion of the equation, you can begin to see over time if you are saving enough money towards your financial goals. Are you saving enough towards retirement? Do you have enough money saved for your children’s college fund? Calculating your net worth can help you identify these shortfalls and using a savings calculator can help you determine how much extra you may need to save for a particular goal. The same warning signs can be determined for your liabilities as well when calculating your net worth. Is your credit card debt rising? Are you making significant dents incontributions to eliminate your debt or just barely making the minimum payments? Calculating your net worth will identify these trends over time.

How do you know if you are headed in the right direction financially unless you track exactly where you currently stand? Your net worth is the classic accounting method used by businesses and individuals alike to determine their complete financial picture. Everyone should monitor their financial situation by regularly calculating their net worth.

You could do it from the perspective of an interested bystander but your net worth number can be a tool if you use it as a reference point in regards to your financial goals.

To use it like that, you will need to set long-term and intermediate goals for the growth in your net worth.

The question then becomes: What goes into computing your net worth? There is a variety of opinion on that issue. Some say to leave your home equity out of the equation but I disagree. For many families, equity in their home represents the greatest part of their net worth.

And the mortgage on your primary residence is like the amortized purchase of an annuity. Once you own your home mortgage-free, it begins paying off in the form of imputed income.

You could do it from the perspective of an interested bystander but your net worth number can be a tool if you use it as a reference point in regards to your financial goals.

To use it like that, you will need to set long-term and intermediate goals for the growth in your net worth.

And then the question becomes: What is included in the equation to calculate your net worth. Some say to exclude home equity but I disagree; doing so would under-value the true picture for many of us since equity is the greatest part of our net worth.

The mortgage on your primary residence is like the amortized purchase of an annuity. Once you own your home mortgage-free, it begins paying off in the form of imputed income.

Excellent reminder Hank. It’s easy to get sidetracked by all the things we want to do to build wealth, and then forget to measure the ultimate goal. This is a good periodic excercise. I like to keep mine in a folder as a record, but also as an encouragement so I can see the progress I’ve made over the years!

Thank you for reminding people to measure the goal. Our investment planning, saving, and investing is with the ultimate goal of growing wealth. ALL of your assets should be included in the calculation including your home. I like to keep my net worth calculations in a folder so I can be encouraged by the progress over the years.
Ken Faulkenberry

I disagree that your equity in your primary home should be included in your Net Worth calculations. The value of this home is illiquid — meaning, if you needed to take the money out, you’d have to undergo a major hassle, plus pay hefty fees, in order to do it.

Furthermore, if you sold the home, you’d still need a place to live — so you’d just have to buy another home, or pay rent.

And finally, this home costs you money every month — in taxes, insurance, utilities, repairs, maintenance — rather than putting money in your pocket each month.

Now, if you own a rental property, I’m all about including that in your Net Worth. But I think a home is a place you live, not an addition to your net worth.

I use mint.com to track my net worth and it works pretty well. I was a little concerned with entering in my total financial life into a third party aggregator but I don’t think there have been any security problems…

I have a personal goal of making it to retirement. My math would include the $100k in retirement accounts as an asset as that is a large part of the reason we all need to accumulate wealth. I suppose that stresses the point that most people don’t know how to calculate their net worth! Retirement counts.

Or By E-mail

Disclaimer

Any information shared on Own The Dollar is provided for informational and entertainment purposes only and does not constitute specific financial advice. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You should discuss your specific requirements and situation with a qualified financial adviser.